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Tamer Than Expected Inflation Data Sparks Rally On Wall Street

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Stocks have moved sharply higher in morning trading on Wednesday, more than offsetting the weakness seen in the previous session. With the strong upward move, the Dow and the S&P 500 have reached their best intraday levels in three months.

Currently, the major averages are just off their highs of the session. The Dow is up 526.63 points or 1.6 percent at 33,301.04, the Nasdaq is up 261.39 points or 2.1 percent at 12,755.32 and the S&P 500 is up 68.01 points or 1.7 percent at 4,190.48.

The rally on Wall Street reflects a positive reaction to a highly anticipated Labor Department report on consumer price inflation, which showed prices unexpectedly came in flat in the month of July.

The Labor Department said its consumer price index was unchanged in July after jumping by 1.3 percent in June. Economists had expected consumer prices to edge up by 0.2 percent.

Compared to the same month a year ago, consumer prices in July were up by 8.5 percent, reflecting a bigger than expected slowdown from the 9.1 percent spike in June.

The annual rate of price growth was expected to slow to 8.7 percent from the four-decade high seen in the previous month.

Meanwhile, the report said core consumer prices, which exclude food and energy prices, rose by 0.3 percent in July after climbing by 0.7 percent in June. Core prices were expected to increase by 0.5 percent.

The annual rate of core consumer price growth was unchanged at 5.9 percent, while economists had expected an acceleration to 6.1 percent.

The tamer than expected inflation data has led to speculation that the Federal Reserve will slow the pace of interest rate hikes at its September meeting.

CME Group's FedWatch tool is currently indicating a 61.5 percent chance of a 50 basis point rate hike and a 38.5 percent chance of a 75 basis point rate hike.

"Today's inflation report might lead the Fed to downshift the size of its rate hikes to 50bps in September," said Kathy Bostjancic, Chief U.S. Financial Economist at Oxford Economics.

She added, "However, we still see 75bps as likely given the ongoing inflation pressures, still elevated inflation readings, and ongoing tight labor market that is leading to large wage gains."

Interest rate-sensitive housing stocks have soared following the inflation data, driving the Philadelphia Housing Sector Index up by 4.3 percent to a three-month intraday high.

Substantial strength has also emerged among computer hardware stocks, which are rebounding strongly after falling sharply on Tuesday.

Reflecting the strength in the sector, the NYSE Arca Computer Hardware Index is jumping by 3.4 percent to its best intraday level in two months.

Airline stocks are also showing a significant rebound after yesterday's weakness, with the NYSE Arca Airline Index soaring by 3.1 percent.

Chemical, banking and retail stocks are also seeing considerable strength, while energy stocks are bucking the uptrend amid a steep drop by the price of crude oil.

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Wednesday. Japan's Nikkei 225 Index slid by 0.7 percent, while Hong Kong's Hang Seng Index plunged by 2 percent.

Meanwhile, the major European markets have moved to the upside on the day. While the German DAX Index is up 0.9 percent, the French CAC 40 Index is up by 0.6 percent and the U.K.'s FTSE 100 Index is up by 0.1 percent.

In the bond market, treasuries have pulled back off their early highs but remain firmly positive. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, is down by 7.8 basis points at 2.719 percent.

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